Author: Gabriel Costa and Luisa Girão

Source: Jornal do Brasil, 10/01/2009

RIO – When the economy is doing badly, it is traditionally believed that this is a time for the expansion of informality. In the year in which experts say the global financial crisis will reach its peak, however, not even the so-called shadow economy is expected to escape the downturn. The assessment is by Professor Fernando de Holanda Barbosa Filho, one of the researchers responsible for the Underground Economy Index, measured since 2008 by the Brazilian Institute of Economics of the Getulio Vargas Foundation (Ibre/FGV) in partnership with the Brazilian Institute of Ethics in Competition (Etco) .

 

Applied by the two institutions in Brazil, the concept of underground economy encompasses not only the so-called informal market, but also other sectors of conventional economic activity. Legalized companies that fit into the formal economy, but evade taxes or disregard government environmental standards, are also included in the classification.

 

Barbosa explains that, in fact, the movement of the underground economy is closely linked to the direction of the formal market. In this way, a slowdown in the economy is directly reflected in activities beyond the reach of the State.

 

– The two sides of the economy interact, they are not isolated. When the population's income increases, it consumes more from the underground economy and the formal economy – says the professor. – Even if I have a formal job, I may need to buy an umbrella on the street when it rains.

 

Opposing pressures

Among the factors that determine the pace of activity in the underground economy are rigidity in the labor market, the tax burden, the perception of corruption and the country's exports. The first three have a direct relationship with the index, that is, the more rigid the market and the more taxes are charged, the more workers migrate to alternative markets. Exports negatively influence the index, as they are part of a highly bureaucratized segment, which makes it difficult for companies to operate outside legal regulations.

 

In the current crisis scenario, therefore, the sector must suffer pressure in two opposite directions: the country's economic slowdown, which, according to the study, would result in the contraction of the underground economy; and the drop in exports, which would give impetus to the index.

Barbosa believes that the drop in export activity, in itself, will not be strong enough to offset the effects of the slowdown on the activities that make up the underground economy. André Franco Montoro Filho, president of Etco, prefers to wait for the next results to assess the impact.

 

– As long as there is demand for the services and products that the underground economy offers, there will be people to work in the sector – says Montoro, who presided over BNDES between 1985 and 1987.

 

Saleswoman Ezenita de Souza, who has a shirt stall in Largo da Carioca, says she opened the business because she was unable to obtain the necessary income when working with a formal contract. She says she can earn up to R$1,5 a month, but that the movement has decreased in recent months.

 

– I always managed to save money to compensate for the first months of the year, when sales are weaker. This year I couldn't. I don't know if it's because of the crisis or if it's because it's been raining a lot – resigns Ezenita, who is already devising plans to face the crisis and the competition from a fair with 83 stalls that opened near her place of work. – My strategy for this year is to relaunch the Radical Chic shirt, because it was a very successful product.